The following is from The Economist, Economists need new indicators of economic misery, November 14, 2024:

Economists appear to be missing something fundamental about how people experience the economy. 

A rough-and-ready indicator of the state of the economy, what [used to be] called the economic discomfort index added together the unemployment rate with the level of inflation. Four years later Ronald Reagan…renamed the indicator to the pithier misery index…

Much of the improvement in the misery index over Mr Biden’s term came from falling unemployment, which was at 6% when he took office…Then the [stimulus checks] stopped and inflation soared; real disposable personal income is still lower for many Americans today than in 2021, despite a red-hot jobs market.

The reality is that Mr Biden’s second stimulus package, passed in 2021, boosted demand when the economy was struggling to produce. That exacerbated inflation, which left voters feeling poorer.

The Economist notes that a key flaw of the misery index is that most inflation estimates don’t include the cost of borrowing in their calculations, including the Consumer Price Index. More on that from The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment (Bolhuis et al, 2024):

The economy is booming, and everyone knows it - except for the American people.

We show that the lows in US consumer sentiment that cannot be explained by unemployment and official inflation are strongly correlated with borrowing costs and consumer credit supply. Concerns over borrowing costs, which have historically tracked the cost of money, are at their highest levels since the Volcker-era.

With higher [interest] rates, mortgage payments, car payments, and other credit payments required to finance everyday purchases have risen as well…Given that home prices remain at historic highs despite higher interest rates, the interest payment on a new 30-year mortgage for the average house has increased more than threefold since 2021. The interest payment on a new car loan has increased more than 80 percent.

Global evidence shows that consumer sentiment gaps across countries are also strongly correlated with changes in interest rates…Overall, our cross-country comparison for 10 [developed] countries concludes that the phenomenon of a discrepancy between [official economic indicators] and consumer sentiment is not unique to the United States but is prevalent across multiple countries.

The extent of this gap varies by country and is highly correlated with interest rate changes. Additionally, we do not find evidence that the discrepancy is correlated with changes in trust in government across countries [including the U.S.].

In other words, consumer sentiment isn’t out of touch with economic reality. Rather, official measures of economic reality don’t reflect the actual reality of our lives.

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Reference:

The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly Marijn A. Bolhuis, Judd N. L. Cramer, Karl Oskar Schulz, and Lawrence H. Summers. NBER Working Paper No. 32163 February 2024. http://www.nber.org/papers/w32163.pdf